Hotels & Hospitality Group | May 2014
Pub Investment News
FOR SALE: Royal Inn Hotel, Waratah NSW
In this issue 04
New South Wales
05
07
Victoria
National transaction overview
Queensland
10
13
Under the spotlight – Compliance
Cover: FOR SALE: Patonga Beach Hotel, Patonga NSW JLL’s Hotels & Hospitality Group serves as the hospitality industry’s global leader in real estate services for luxury, upscale, select service and budget hotels; management rights; convention centers; mixed-use developments and other hospitality properties. The firm’s 300 dedicated hotel and hospitality experts partner with investors and owner/operators around the globe to support and shape investment strategies that deliver maximum value throughout the entire lifecycle of an asset. In the last five years, the team completed more transactions than any other hotels and hospitality real estate advisor in the world totaling nearly US$36 billion, while also completing approximately 4,000 advisory and valuation assignments. The group’s hotels and hospitality specialists provide independent and expert advice to clients, backed by industry-leading research. For more news, videos and research from JLL’s Hotels & Hospitality Group, please visit: www.jll.com/hospitality or download the Hotels & Hospitality Group’s iPhone app or iPad app from the App Store.
4 Pub Investment News | May 2014
Transaction volumes rally
Yields expected to compress in 2014
Australia’s pub sector kicked into gear once again in 2013 with transaction volumes increasing 50% compared to 2012 to total $775 million. Receivership sales dominated activity during the first half of the year but there was a notable shift towards aggressive expansion over the latter six months as investor confidence cemented.
Amped by plentiful equity and increasingly proactive debt, the only drag on the Australian pub investment market in 2014 will be a lack of quality stock with the availability of assets expected to tighten during the second half of the year as sellers become increasingly reluctant to relinquish assets in a generally rising market.
In a marked change to 2012, investment activity was concentrated in the $10-$20 million bracket with 24 assets exchanging hands and a combined total volume of $349 million. The higher average deal size indicates further growing confidence in sector. Whilst New South Wales dominated transaction activity during the first half of the year, Queensland saw greater deal flow in H2. Investment activity in Victoria continues to remain steady due to changes to the gaming tax structures which took effect in August 2012 and the pending decision around gaming entitlement security. Overall, NSW recorded the lion’s share of transaction volume ($378 million), followed by Queensland ($215 million), Victoria ($144 million) and South Australia ($22 million). Easing liquidity and record low debt were the primary drivers of increased activity with a raft of buyers attracted to the sector. Active groups included retailers, private publicans and private equity funds. Cross border acquisitions also came to the fore as a number of Sydney based groups made their first foray into the Queensland pub market with large-scale strategic investments. Assets in Queensland generally have strong intrinsic value with gaming authorities rising and state legislation ensuring off premise income streams are only permitted with a commercial licence.
Australian Pub Transaction Volumes 2004 to 2013 180
2,500
Volume ($M)
140 120
1,500
100 80
1,000
60 40
500
20 0
2004
2005
2006
Single Asset ($M)
Source: JLL
2007
2008
2009
Portfolio ($M)
2010
2011
2012
2013
Number of Transactions
0
Number of Transactions
160 2,000
Limited investment opportunities in first-choice markets and increased competition, implies some yield compression in 2014, with a flow-on impact to other locations and markets. Wide yield spreads between real estate markets (e.g. CBD and nonCBD) and sectors also offer generous incentives to migrate along the risk curve and contemplate alternative locations and sectors. With large Freehold Going Concern assets attracting yields in the order of 11%, Australian pub real estate offers an attractive positive yield spread (to the cost of debt) and this is likely to attract new sources of equity to the sector. Indeed we are already seeing the emergence of offshore capital, notably from China in the global hunt for yield. Investments are prefaced by a sound management company with buyers targeting assets with a robust underlying property value. Deal structuring is also becoming more commonplace. This trend is being led by the operators as they look to reposition assets to capitalise on the latest consumer trends or legislative changes, as outlined later in this report. This can include a delayed settlement or lease-to-buy for example. Established operating groups are successfully resuscitating stale pub assets, breathing life into them with their marketing machine and use of social media platforms. Many of these groups have established brand loyalty and access to deeply connected customer networks which can be transported into a new venue upon opening. Banks recognise this and leverage levels for proven operators are increasing with gearing nudging upwards from 50% to around 60%-65%. Private equity players are also more experienced, having bought a supply of distressed assets over the past few years. These groups are now better equipped to identify opportunities and use their scale, financial wizardry and knowledge for opportunistic plays. Despite these drivers, portfolio sales will remain limited with few exit options available for owners, particularly those with larger or gaming assets. Whilst the weight of capital is increasing, there are few groups who have sufficiently sized balance sheet to fund largescale acquisitions. Coles have sold down two thirds of their operating hotels in New South Wales and are churning equity back into their retail business, whereas ALH is already well represented. Against this backdrop, transaction volumes are unlikely to return to 2005-07 peak levels when portfolio sales dominated the Australian pub investment landscape.
“In a marked change to 2012, investment activity was concentrated in the $10-$20 million bracket with 24 assets exchanging hands and a combined total volume of $349 million.” John Musca National Director – Investment Sales
May 2014 | Pub Investment News 5
SOLD: Jacksons on George, Sydney NSW
New South Wales The New South Wales pub market enjoyed a buoyant year in 2013 with 54 assets transacting with a total transaction volume of $377 million, up 59% on 2012. The average deal size also increased to $7 million. Food and beverage assets dominated activity during the first half of the year, but gaming venues stole the limelight during H2 2013, underpinned by strong supply and demand fundamentals.
Whilst the number of poker machines in New South Wales has diminished over the past few years, demand has increased with strong growth in resident populations and visitors who are predisposed to gaming as a form of entertainment. Local Environment Plan’s (LEP) are being revisited and master plans devised. This is resulting in some area re-zonings with organic growth expected along residential corridors and transport nodes. In areas where gaming and wagering is a popular activity, this is putting large-scale gaming pubs back on the acquisition agenda. The impending announcement of a second airport at Badgery’s Creek could also see renewed investor interest in Sydney’s west.
6 Pub Investment News | May 2014
Food-led venues continue to be the focus in Sydney city and the city fringe, particularly those in good locations which are deemed to be under-performing and therefore offer the opportunity for repositioning. Global street food trends are increasingly being incorporated into venues with operators taking their cues from London and the U.S. This has spawned a raft of new ‘drink and dine’ concepts which is fuelling consumer demand trends. Offsetting these positives has been the introduction of legislation in early 2014 aimed at curbing alcohol-fuelled violence. This has squarely put the sustainability of earnings back into the acquisition decision. This umbrella legislation has had wide-ranging impacts beyond the liquor-led entertainment venues it sought to restrict with gaming, wagering and food-led businesses some of the hardest hit.
“The New South Wales pub market enjoyed a buoyant year in 2013 with 54 assets transacting with a total transaction volume of $377 million, up 59% on 2012.”
Whilst the near term trading environment is somewhat challenging, the city landscape is undergoing a fundamental shift with some of the most significant infrastructure investments for over a decade. Major development projects include Barangaroo, Sydney Convention Exhibition and Entertainment Centre (SICEEP), upgrade of the Overseas Passenger Terminal, CBD and South East Light Rail, Chinatown public domain plan, the Green Square transformation project as well as the proposed Central & Eveleigh project. Against this backdrop, it is hard to say where yields are at with deals ranging between 0% and 12% across the Sydney metropolitan area. Overall the barriers to entry remain high, with few new liquor licences granted in recent years and a continued focus on compliance. However, now more than ever it is apparent that transactions are bespoke to the parties involved and it is the mechanics of the deal which dictate the yield profile. Business profile, location, price point and buyer strategy are all factors to be considered.
Pub Investment Trends 2004 to 2013 by Transaction Price 2,500
Sam Handy Manager – Investment Sales
SOLD: Palms Hotel, Chullora NSW
Volume ($M)
These changes are likely to impact Sydney’s night economy over the coming years as residents and visitors seek out alternative entertainment options. Naturally, venues which fall outside of the lock out areas stand to benefit the most and we are already seeing the first manifestations of this with the opening of Casablanca nightclub in Double Bay (formerly Bluebeat). Whilst Double Bay has been experiencing the early signs of revitalisation, this may well gain pace as lock outs are enforced across the Sydney CBD entertainment precinct (as shown on page 15). The beachside suburb of Bondi is also expected to be reinvigorated as an all-night destination with new small bars popping up, celebrity chefs and an expectant public eagerly awaiting the announcement of the bar operator for the Pacific Bondi development.
2,000 1,500 1,000 500 0
2004
2005 $20M plus
2006
2007
$10.1M-$20M
2008
2009 $5.1M-$10M
2010
2011 $1.1M-$5M
2012
2013